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Over the long-haul, investors are more interested in risk-adjusted return as price fluctuations due to volatility in spreads and rates are less important. Those who are concerned about lofty valuations and volatility may take comfort knowing that the High-Yield Index was resilient through the worst financial crisis in recent memory. Looking at the recent financial crisis, the maximum default rate on high-yield credit did not exceed 14% and high-yield bond indices declined by no more than 33% before recovering. Over this period, high-yield bonds managed the volatility better than equities, even recovering more quickly after nine months, compared to the 27 months needed for the S&P 500.
“In addition, in the years that followed the crisis, the High-Yield Index not only exhibited higher returns but also exhibited lower volatility than the S&P 500,” Legunn said.
Investors who are interested in gaining exposure to high-yield debt may consider a bond ETF option like the Deutsche X-trackers USD High Yield Corporate Bond ETF (NYSEArca: HYLB), which tries to reflect the performance of the Solactive USD High Yield Corporates Total Market Index. HYLB has a 0.25% expense ratio, a 5.35% yield to worst and an average 5.68 year duration.
“ETFs mitigate idiosyncratic (i.e. issuer-specific) risk by providing investors with low-cost exposure to well-diversified baskets of high-yield bonds,” Legunn said.